Heading into the third quarter, the share price of Chicago Bridge & Iron (NYSE:CBI) looks incredibly depressed. As of the time of this writing, shares of the business are going for $27.80 which, although are 6.4% above their 52-week low, are still trading about 40% lower than their 52-week high. In what follows, I intend to go over some of the data regarding the company, detailing what analysts are expecting but also what I believe investors should expect when management releases third quarter operating results on October 27th after the market closes.
A look at analysts expectations
For the quarter, analysts don't seem to have very high expectations for CBI. For instance, if they are correct, the company should generate revenue of around $2.75 billion, which would represent a decline of 14.3% compared to the $3.2 billion the firm generated the same period a year ago. Though some of this will certainly be due to a deterioration in the energy infrastructure business, a key part of this decline will be attributable to the sale of the firm's nuclear construction business to Westinghouse, a majority-owned holding of Toshiba (OTCPK:TOSBF) (OTCPK:TOSYY).
On the bottom line, the picture looks less appealing. If analysts end up being correct about where the company's profits are trending, CBI's earnings per share (absent any impairments) should be around $1.17. Though this would represent net income of around $123 million, which is a nice chunk of change, it would imply a drop of about 24% from the $1.54 in adjusted earnings the company generated the same quarter last year. Actual earnings last year came out to a loss of $7.02 per share during the quarter but this was due to substantial writedowns associated with its nuclear construction business being sold.
What I believe investors should keep watch for
Heading into the release, there are a few things that I believe investors would be wise to watch out for. First and foremost, I think that analysts' expectations are probably about right this time around. If you look at CBI's second quarter release this year, sales came out to $2.70 billion, a drop of 15.9% compared to the same time last year, and they were down about 15.3% in the first two quarters, dropping from $6.33 billion to $5.36 billion year-over-year. If anything, this suggests that it wouldn't be unreasonable to expect a slightly larger miss than what is being forecast here.
On the bottom line, the picture looks similar. Year-over-year in the second quarter, earnings averaged $1.17, down 24.5% from the $1.55 per share earned the same period a year earlier. Meanwhile, earnings were down 21% from $2.76 per share in the first two quarters last year to $2.18 per share in the first two quarters this year. Based on this trend and the reliability of sales and profits based on CBI's backlog, it's reasonable to anticipate similar bottom line results, give or take a few cents.
Beyond that though, there are some other items investors should keep an eye out for. For instance, one area that management will likely focus on is the issue of debt reduction. During the first two quarters this year, management succeeded in paying down $254.94 million worth of debt, bringing total debt down from $2.59 billion to $2.34 billion as of the time of this writing. With cash on hand of $602.91 million and near-term debt of $391.27 million (debt due within 12 months of CBI's second quarter report), the debt situation may look a little scary but that brings me to the second point.
Last quarter, management stated that, although they were lowering sales and earnings guidance this year, cash flows from operating activities should come in at $650 million or more this year. If this turns out to be correct, it would mean that in the last two quarters this year the company must generate cash flow of at least $330.74 million, which boils down to around $165.37 million each quarter. I do not know how this will be distributed from quarter to quarter but I do suspect that some, if not all, of this money will be allocated toward reducing the firm's debt on hand, which would also reduce interest expense marginally and increase profitability, ceteris paribus, moving forward.
The last thing I suspect is that management will be focusing some more on cost reductions. In the first two quarters this year, the firm's cost of goods sold came out to 89.1% of sales (the same with just the second quarter), up from 88.1% of sales last year (also the same for the second quarter alone). Meanwhile, selling and administrative costs came out to 3.3% of sales (3.1% in the second quarter) compared to 3.1% last year (but 2.7% in the second quarter). Due to the capital intensiveness of the firm, I suspect that reducing these expenses will be hard but I imagine that some reductions are possible, especially in regards to selling and administrative costs. As older backlog gets worked through, which likely allowed for a less stringent focus on profitability, and gives way to newer backlog, the chance of margin improvement grows. I do not think this will be material per se but every 0.1% in reduction from $2.75 billion in sales comes out to $2.75 million in additional pre-tax profit and about $0.026 per share in additional pre-tax earnings.
Two things I hope management gives clarity on
Besides these items, there are two things that I hope management can give clarity on but am not expecting a great deal of information about. First and foremost if the firm's lawsuit involving Westinghouse. Earlier this year, Westinghouse sued CBI for over $2 billion associated with the firm's sale of its nuclear construction business. As I already showed in the past, this lawsuit is wholly without merit unless CBI did not engage in good faith with Westinghouse. Under any other scenario, it's likely that CBI could receive in excess of $400 million from the firm, which could also be used to pay down debt, but that won't happen for the third quarter release. I, personally, would love to see an update regarding their stance on the lawsuit.
The other item relates to a small set of operations run by CBI. Right now, they are a partner in a firm called NET Power, which is building a demo plant for its new energy generation facility utilizing the Allam Cycle concept, whereby the firm can generate electricity for natural gas or coal while reducing emissions. The company is hoping to take its first orders next year but it has been a while since their last meaningful update on it. Seeing the progress so far could instill confidence in investors.
Based on the data provided, it seems that CBI is looking at a tough quarter but it's probably in a range that is to be expected. Besides sales and profits, however, there are a few other items that investors should be on the lookout for; items that would help to demonstrate the impressive value proposition that CBI offers. Good news regarding any of these could be a nice catalyst for shares to break from their current lows and move higher, which is where I believe they belong.
Disclosure: I am/we are long CBI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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